The Grass Isn't Greener

The Grass Isn't Greener

By William
Spriggs4 September 2014

News last month
showed that the Eurozone countries had a bad second quarter
of economic growth. For the three-month period that ended in
June, the Eurozone economies grew at 0.0 percent. Germany,
the largest economy in that group, shrank by 0.2 percent,
and Italy, the third largest, fell back into recession.
While initially there was much celebration that Germany's
work-sharing schemes prevented the massive job losses
experienced in the United States, Germany's tepid fiscal
response, and weak accommodation by the European Central
Bank (ECB) to the global downturn of 2008, have meant Europe
continues to flounder. This should be a real lesson that
austerity is not a better proscription than the policies
pursued in the United States.

This week, the U.S. Bureau
of Economic Analysis posted an upward revision to America's
second-quarter growth, a healthy rebound from the decline of
the first three months that ended in March. Comparing Europe
with the United States, some may view the 4.2 percent growth
as a sign this country is roaring. But, that should be
tempered because against the 2.1 percent shrinkage of the
first quarter, it means so far this year the United States
is growing well below the the U.S. Federal Reserve Bank
growth target.

At Grand Teton National Park in Wyoming
last week, several of the Federal Regional Bank presidents,
Chair Janet Yellen and Vice Chair Stanley Fisher of the
Federal Board of Governors and high-ranking central bankers
from Japan, Brazil and the U.K. convened to discuss the very
fine points of whether the labor market is tight enough to
exert inflationary pressures on the economy. While Mario
Draghi, president of the ECB, painted a "grass is greener"
picture of the U.S. labor market, his cautious tone
suggesting it may be time for the ECB to be more aggressive
echoed the standard view of many that central bankers really
don't understand the precarious position of working people.
To that end, a group of workers, organized by the Center for
Popular Democracy, also convened at the Jackson Hole
Economic Policy Symposium to put names and faces to the more
sterile unemployment numbers and esoteric discussion of
whether long-term unemployed workers are the cause of weak
labor pressures on wages.

In her remarks, Yellen explained
the more aggressive stance U.S. monetary policy has taken.
She did appear, however, to waiver on how weak the U.S.
labor market is. Since the gathering in Wyoming was about to
hear research on the subject, perhaps she wanted to offer a
balanced stance to encourage engagement of the regional bank
presidents in the dialogue. In the face of continued
moderate price inflation despite the continued expansion of
the labor market, "hawkish" economists have new explanations
to tout why inflation is just around the corner.

One novel
idea is that firms have a hard time cutting the wages of
existing workers, and so are now engaged in pent-up wage
deflation-gaining a return to targeted profits by
suppressing wage growth. Under this theory, at any moment
the current unemployment rates will pressure firms to
escalate wage growth. Another is that because the long-term
unemployed are viewed as undesirable by firms, firms react
only to the short-term unemployed and are willing to bid up
wages to hire them, and do not hold over workers the
presence of large numbers of jobless people who might take
the job for less. All this to maintain a theory that
unemployment and inflation are strongly related, and
unemployment cannot continue to fall without costing the
economy with higher rates of inflation.

But when there is
uncertainty, the best way may be to look at the costs of the
relative risks in the economy. Right now, the automobile
market, a key ingredient in U.S. resurgence, is fueled by
loans to people with scarred credit records. That debt is
sustainable as long as those workers can keep their jobs and
keep making payments. So the cost of raising interest rates
and making those loans more costly is the threat of
repossessions growing, flooding the auto market with
thousands of used cars and plunging demand for new
automobiles and jobs. That's a big downside risk, since new
auto sales also generate tax revenues for state and local
government-the weakest segment of the recovery. Add to that
it has taken us five years to get to this point of recovery,
and the downside risk looks very
high.

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